Many in the property industry will be shouting "good news all around" when the Government unveils its NewBuy Guarantee scheme later this month. But should aspiring homeowners really be welcoming this latest scheme with open arms?
Housing minister Grant Shapps has said that NewBuy will offer 100,000 homebuyers the chance to buy a new-build property with only a 5 per cent deposit. The typical deposit needed to buy a home is 20 per cent; so for a home worth £200,000 buyers under this scheme need a deposit of £10,000 rather than £40,000.
"All the major lenders have signed up," says Steve Turner from the Home Builders Federation, which together with the Council of Mortgage Lenders (CML) has been developing the scheme. "The biggest constraint on sales and construction is the fact that people can't get mortgages. Very few people can afford a 20 or 25 per cent deposit but this will reduce deposits to a realistic, achievable level."
NewBuy is due to be launched later this month but the Government, lenders and housebuilders are still working behind the scenes to iron out the finer details. There are some positive signs, not least of which is that unlike other initiatives that have been rolled out in the past, this is open to existing homeowners as well as first-time buyers (FTBs) on properties worth up to £500,000.
"The housebuilders are behind this and I anticpate to see Nationwide, Lloyds and Santander move in from the likely start date of 12 March," says Nigel Stockton, a financial services director at Countrywide.
Lenders are being offered the security of protection against losses caused by further dips in the housing market. Developers will do their bit by putting up 3.5 per cent of a property's value as deposit with the lenders, and the Government will top up the guarantee with another 5.5 per cent.
"Lenders can lend with more comfort and without incurring risk and capital issues. Lenders typically have lower loan to values (LTVs) on new-builds than existing buildings so what this does is level the playing field a bit," says Sue Anderson from the CML.
What this scheme does not do, however, is make any guarantees as to the supply of mortgage finance, or how competitively priced these mortgages are likely to be. And the initiative is arriving at a tricky time in the market with major lenders such as Halifax and Royal Bank of Scotland increasing rates on a range of home loans last week because the cost of raising the funds on the money markets has risen.
As well as first-time buyers, many existing homeowners are struggling to move into a new home because house prices have dropped and left them with little equity to put towards a new purchase. As things stand, if you haven't built up a large deposit, mortgages carry a considerable premium. For example, Newcastle building society offers a two-year fixed rate at 5.95 per cent up to 95 per cent LTV with a £995 fee, but if you can afford to take a mortgage at 75 per cent, Yorkshire BS has a two-year fixed rate at 2.79 per cent, a saving of over 2 per cent.
If you're not looking to buy a second-hand property, lenders are always going to be more cautious. New-builds make lenders nervous because they are more vulnerable to house price fluctuations and the build quality can vary widely.
"A new-build is harder to value than an existing property and it has a premium attracted to it which doesn't necessarily extend when you resell – it's a bit like driving a car off the forecourt – which tends to mean that even in a buoyant market, lenders are more careful," says Ms Anderson.
In fact, according to Mr Stockton, some lenders won't give mortgages on new build homes: "Apartments are particularly problematic. Nationwide, for instance, used to value new-build the same as second-hand property – normally lower value – therefore below the asking price. However, things are improving and this should continue as NewBuy rolls out."
Lenders are also going to be just as fussy when it comes to applicants, particularly with first-time buyers, so only those with squeaky-clean credit records are going to get the go ahead and there is nothing to suggest that lenders will be in a position to offer cheaper loans under the NewBuy scheme.
In the wake of the financial crisis, lenders were quick to snatch all of their 95 per cent mortgages off the shelves. There may have been several new launches at high LTV already this year with Leeds, Newcastle and Ipswich building societies all releasing 95 per cent loans, but the problem remains that there is still little choice.
"NewBuy should help to improve this, but at this stage it is impossible to quantify what impact the indemnity scheme will have until we start to see products come to market," says David Hollingworth from mortgage broker London & Country.
The latest figures from the British Bankers' Association show a 33 per cent rise in mortgages being approved (increasing from 28,539 in January 2011 to 38,092 this January). But, this is largely due to the stamp duty holiday for first-time buyers which ends in March and overall, there is still something of a mortgage drought when you compare this to the highs of 130,000 loan approvals in November 2006.
If you don't want to wait for NewBuy, some housebuilders have their own high-equity schemes. For example, Linden Homes offers "Step Up" which enables new homeowners to access a 95 per cent LTV loan at a fairly competitive rate of 4.99 per cent, fixed until April 2015. This allowed Daniel Jones, 28, an account manager, to buy a three-bed townhouse in Haywards Heath, West Sussex. After renting a two-bed, Daniel and his partner Nick (and their two dogs) decided they needed more space.
They had been saving for some time but found lenders hesitant and mortgages pricey. After seeing the 95 per cent Linden deal, they were able to put down a deposit of £12,500 for their home, priced just shy of £250,000 and moved in before Christmas.
"We still had to borrow a little from parents, but the majority of it was ours. In the second-hand market you needed at least 85 per cent LTV before you get a decent rate," says Daniel. "We lived in a tiny house before, this place is double the size and we're only paying £100 or so more a month than when we were renting."
Expert view: David Hollingworth, London & Country
"The success of NewBuy will only really be known once we see how lenders respond. There has been gradual improvement in the deals available at higher LTV but they are still thin on the ground and rates remain high."